Tax rates, allowances and amounts How tax is collected

Tax basics

If you're self employed, you'll need to fill in a tax return

PAYE tax

If you work for an employer or receive an employer's pension or personal pension, tax is usually collected under the pay as you earn (PAYE) scheme.

This means the tax you owe is automatically deducted from your pay by your employer and sent to HMRC. National Insurance is also collected this way.

Self-assessment tax return

Though most people pay tax through PAYE, some people have to fill in a self-assessment tax return. 

When you need to fill out a tax return

You'll need to fill in a tax return if:

  • You are self-employed, a business partner, director, trustee or if you represent someone who has died.
  • You receive rental income (but possibly not if it's below £2,500 a year and you're on PAYE).
  • You have taxable foreign income.
  • You receive other untaxed income and the tax due on it cannot be collected through PAYE.

When you may need to fill out a tax return

You might also have to fill out a tax return if you are an employee or over 65 and:

  • Your annual income is more than £100,000 or you receive untaxed income of at least £2,500 a year
  • You have annual investment income of at least £10,000 or you claim £2,500 plus a year in expenses
  • You're entitled to some age-related personal or married couple's allowance but not the full amount (unless your affairs are very straightforward).

For more details see Tax returns.

Declaring untaxed income

If you receive some income without tax deducted but you are liable for tax, you have to declare the income to HM Revenue & Customs – your tax office will tell you how to do this. You pay the extra tax either through a tax return or via an adjustment to your tax code if you are a PAYE taxpayer.

You must tell your tax office about new untaxed income by 5 October following the end of the tax year in which you received the income. So if you received untaxed income during the 2011-12 tax year, you'll have to tell your tax office about this by 5 October 2012.

Deadlines and penalties

There are specific deadlines for filing your tax return, paying your taxes and, in some circumstances, informing HMRC of new income. 

If you file your return or pay you taxes late (or fail to meet any other deadlines), you may have to pay a penalty. Interest is also charged where tax is paid late.

Revised penalty regime

HMRC has now introduced a revised penalty regime which could mean that you may have to pay a penalty if there is an error in your return which is either deliberate, or has resulted from you not taking reasonable care when preparing the return or supporting information. 

For more details see Tax appeals, disputes and complaints.

Tax already deducted

Most savings income, such as interest from bank and building societies, has tax deducted at the basic rate of 20% before you receive it. You only have to pay any further tax on it if you're a higher-rate taxpayer.

Non payers

If you are a non-taxpayer, you can claim back the basic rate tax that has been deducted. If your non-savings income is very low, you may be able to claim back half the tax deducted from your savings income, and pay only 10% on some or all of it.

Tax treatment from dividends

Dividends from UK shares and distributions from some unit trusts are paid to you with a tax credit of 10%. Unlike tax on savings interest, non-taxpayers can't claim this back. 

Basic-rate taxpayers have no more tax to pay. 

If you’re a higher-rate taxpayer you’ll pay a further 25% of the net dividend, either through your tax return or via your tax office, which will tell you how tax on dividends will be collected if you don't fill out a tax return (usually your PAYE code will be adjusted). If you pay the additional 50% tax rate, your dividend income will be taxed at 42.5%, leaving you a further 36.11% to pay. 

Avoiding tax

Tax avoidance, where you arrange your finances to pay as little tax as possible, is a legal course of action.
Tax evasion, where you conceal income or gains or fraudulently claim allowances or other deductions, is a criminal offence. You can be fined or even imprisoned.

For a definitive guide to all aspects of UK tax, buy a copy of the Tax Handbook 2011/12.

Chartered Institute of Taxation

Which? is grateful for assistance from the Chartered Institute of Taxation in compiling this guide. For details of the Institute and its work, see www.tax.org.uk 

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